Economic meltdown: agenda for India in 2009

— Dr Subhrangshu Sekhar Sarkar2008 may not have been the best of all times but it was not the worst either. It experienced some volatility may it be in economy, politics, stock markets etc. Global oil and commodity prices reached skywards last year fuelling inflation and a hike in interest rate in India. This was followed by the tremors from the US financial crisis and India took a blow as GDP growth rate projection went down sharply from 9 per cent to 5.5 pe rcent. On the top there was a terror attack on Mumbai. But this does not exhaust everything of significance. There are positive signs in Indian economy. For example, where oil price plunged from record peaks of $147 in July 2008 to below $40 currently. Inflation is coming down and that should enable interest rate cuts to restart India’s consumption boom. Moreover, the current crisis has led to calls to redesign the global financial architecture and give a greater role to big emerging players such as India, a significant player in the world’s economic affairs. To this end, heads of the government of Group of 20 (G20) already met in Washington in November 2008. G8 may give way to G20, giving India a seat at the high table.

India certainly is not an exception to the global economic meltdown but fortunately the problem here is not as acute as in some other countries. Conservatism and excessive regulation of banking in India, perhaps, has helped us in this instance. This should not give any reason to halt reforms in the future. The current economic crisis provides us with a timely opportunity to review our basic pattern of economic growth and development. We have largely pursued a form of development that emulates the western industrialised world. Sometimes, it seems that this model is largely unsuited to our conditions. It is now seen as flawed even to the citizens of the developed world. It has created high level of economic disparity between different sections of society.

The Deloitte Global Economic Outlook: 4th Quarter 2008, a report published by five Deloitte economists which discusses the historical precedent of financial crisis while predicting the future beyond the current economic predicament for India. The report clearly highlights that currently India will face slower growth prospects with analysts predicting a fall of as much as two percentage points over the next couple of years. However in the longer term, the outlook will depend on the government’s ability to invest in infrastructure and the fundamentals of the Indian economy remain strong and a bounce-back, once set in motion, will be faster than other economies in Europe, North America and Japan. Commenting on the report Dr Kalish, Director of Global Economics, Deloitte Research, said "This report is meant to provide a strategic perspective about the economy for the business community. In the current environment, it is important for companies in both developed and emerging countries to understand the risks they face and the potential impact on their business strategies."

Currently the global economy remains at substantial risk, but the speed and size of the various governmental rescue efforts bode well for a recovery in the not-too-distant future. However, more than half of India’s services and merchandise exports go to the US and the ongoing slowdown in the US economy will likely to affect the future growth in India’s exports. Experts predict that US businesses would likely to reduce outsourcing or withhold expansion plans. Consequently, BPOs, financial services and other software exports contributing to about two per cent of India’s GDP are likely to be affected. Industry association National Association of Software and Service Companies (NASSCOM) has predicted that there is likely to be a significant impact of the global crisis on the Indian BPO sector. Despite significant Asian growth and India’s strategy to focus on non-US markets for exports, a slowdown in the US is expected to influence almost all economies worldwide which will have an eventual cascading impact on the Indian economy.

Notably, for quite some time, India has been demanding its rightful place in international financial institutions like the International Monetary Fund and the World Bank by arguing that they no longer represent the realities of the world and the balance of power in these organisations is tilted more towards the developed countries.

The RBI, in an attempt to ease the liquidity constraints in the economy, reduced the CRR rate several times in September and October, reduced the Statutory Liquidity Ratio and introduced other changes in the quantum of External Commercial Borrowings and foreign institutional investments into the capital markets through participatory notes." The fiscal stimulus package announced by the Government in the New Year 2009 includes several measures to address problems faced by the economy. Lack of access to credit; slow down of exports and domestic demand, as well as accumulation of inventories have been key sources of stress in the economy. Of course, the new package declared in the New Year demands mentioning of some facts. Firstly, with the reduction in interest rates, household loans would become more affordable, however, at the same time care should be taken to remove the apprehension in the minds of the lender regarding recovery of loans. There must be stimulus for lenders to reduce the risk. Secondly, even though repo and reverse repo rate cuts are positive, the CRR cut is not sufficient. Interest rates need to be brought down to the 2004 levels at around 8 to 9 per cent. This may be a way to spur demand and that will lead to economic growth. Thirdly, there is a feeling of many captains of India Inc. that significant benefit could flow to the economy from the additional funding options provided to IIFCL. If indeed, infrastructure projects worth Rs. 1,00,000 crore are implemented over the next 18 months, as envisaged in the package, it will provide a significant stimulus to the economy. Though Government has recognized the importance of infrastructure, yet IIFCL has their limitation that disallows it against lending more than the amount provided by the lead banker in the consortium. Fourth, the relaxation of ECB norms is a positive step as corporate can access borrowings outside India. However, a question is raised regarding the very existence of funds in the international market which could not be mopped up, considering drying up of liquidity in that sphere too.

As we enter 2009 some sad memories of 2008 could obviously cloud our outlook. But the world and India must move on in the New Year. Even though India is feeling the pinch of the financial crisis, however, India could benefit the most from this economic meltdown as this offers new opportunities to it. India has been hurt by the global financial crisis, but it may be better positioned for a quick recovery and for future growth than many of the other developing economies. Indian financial sector is relatively insulated; the rupee is not fully convertible; and Indian banks did not have significant exposure to sub-prime loans in the United States. However, its stock market has been badly hit as foreign institutional investors have sold almost $10 billion of their investments in Indian companies to cover losses accrued in their home markets. Even as there are lot of issues of concern and the Indian economy will be unable to avoid the fallout of a US and European recession, there are reasons for optimism about how quickly India could turn the corner.

The unhappy developments that took place in the last year must provide us determination and willpower to improve our governance and refurbish our institutions by taking care of structural infirmities and systematic failures that contributed to economic meltdown at the global level. There are plenty of things to look forward in 2009.
(The writer is Reader in Business Administration department, Tezpur University) source: assam tribune